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Bitcoin prices went up in 2024. But you might want to be careful before the euphoria drives you into a rush purchase.
Bitcoin and other cryptocurrencies in general should be considered just a sheet of investors’ portfolios—generally more than 5%—due to extreme volatility, according to financial experts.
Some investors may be wise to steer clear of it altogether, they said.
“You don’t have the same size allocation of bitcoin as you would Nasdaq or S&P 500” said Ivory Johnson, certified financial planner and founder of Delancey Wealth Management in Washington, DC.
“Whenever you have a real volatile asset class, you need less in the portfolio to have the same impact” as traditional assets like stocks and bonds, CNBC’s Johnson said. Financial Advisory Board.
Why did bitcoin prices rise in 2024?
Bitcoin, the largest cryptocurrency, was the highest yielding investment 2024, far away. Prices rose about 125%, ending the year around $94,000 after starting in the $40,000 range.
By comparison, the S&P 500, an index of US stocks, up 23%. The Nasdaq, an index of high-tech stocks, rose 29%.
Prices rose after Donald Trump won the US presidential election. His administration is expected to adopt deregulatory policies that would boost crypto demand.
A cartoon image of President-elect Donald Trump holding a bitcoin token in Hong Kong, China on Dec. 5, 2024, to mark the cryptocurrency’s rise above $100,000.
Justin Chin/Bloomberg via Getty Images
Last year, the Securities and Exchange Commission also approved—for the first time— exchange traded funds that invest directly in bitcoin and to the ether, the second largest cryptocurrency, making it easy for retail investors to buy crypto.
But experts warned that the high profits could belie an underlying risk.
“With high returns comes high risk, and crypto is no exception,” Amy Arnott, a portfolio strategist at Morningstar Research Services. he wrote in June
Bitcoin has been nearly five times more volatile than U.S. stocks since September 2015, while ether has been nearly 10 times more volatile, Arnott wrote.
“A portfolio weight of 5% or less seems prudent, and many investors may want to skip cryptocurrency altogether,” he said.
BlackRock says 1% to 2% is “reasonable” for bitcoin
Bitcoin 64% and 74% lost of its value in 2022 and 2018, respectively.
Mathematically, investors need a 100% return to recoup a 50% loss.
So far, crypto’s returns have been high enough to offset its added risk, but the pattern isn’t likely to continue, Arnott said.
You won’t have the same size allocation to Bitcoin as you would to the Nasdaq or the S&P 500.
Ivory Johnson
CFP, founder of Delancey Wealth Management
There are a few reasons for this: Crypto has become less valuable as a portfolio diversifier, Arnott wrote. Its popularity among speculative buyers “makes it prone to price bubbles that will eventually burst,” he added.
BlackRock, the money manager, believes there is a case for holding bitcoin in a diversified portfolio for investors who are comfortable with the “risk of rapid price declines” and believe it will be more widely accepted, according to experts at the BlackRock Investment Institute. he wrote at the beginning of December
(BlackRock offers a bitcoin ETF, the iShares Bitcoin Trust, He will go.)
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A 1% to 2% allocation to Bitcoin is a “reasonable range,” BlackRock experts wrote.
Going further would “significantly increase” bitcoin’s share of a portfolio’s total risk, they said.
For example, a 2% bitcoin allocation is about 5% of the risk of a traditional 60/40 portfolio, BlackRock estimates. But the 4% allocation raises that figure to 14% of total portfolio risk, he said.
More “speculation” than investment?
By comparison, Vanguard, another asset manager, has no current plans to launch a crypto ETF or offer it on its brokerage platform, officials said.
“In Vanguard’s view, crypto is more of a speculation than an investment,” said Janel Jackson, Vanguard’s former global head of ETF Capital Markets and Broker & Index Relations. he wrote In January 2024.
Equity investors own shares in companies that produce goods or services, and many investors earn dividends; bond investors receive a regular interest payment; and commodities are real goods that satisfy consumer needs, Jackson wrote.
“While crypto has been classified as a commodity, it is an immature asset class with little history, no intrinsic economic value, no cash flow and can wreak havoc within a portfolio,” wrote Jackson, now an executive at the firm’s Financial Advisory Services. . the unit
Dollar cost averaging and hold for the long term
Ultimately, one’s entire crypto allocation is a function of investor appetite and risk-taking ability, according to financial advisors.
“Younger, more aggressive investors can allocate more (crypto) to their portfolios,” said Douglas Boneparth, a New York-based CFP and CNBC Advisory Board member.
Investors generally have about 5% of their classic 80/20 or 60/40 portfolio in crypto, said Boneparth, president and founder of Bone Fide Wealth.
“I think it can be a good idea to have exposure to bitcoin in your wallet, but it’s not for everyone and it’s going to continue to be volatile,” Boneparth said. “When it comes to other cryptocurrencies, it’s hard to determine which ones are poised to be a good long-term investment. That doesn’t mean there won’t be winners.”
Investors looking to buy into crypto should consider using a dollar cost averaging strategy, said Johnson, of Delancey Wealth Management.
“I buy 1% at a time until I reach my target risk,” Johnson said. “And so I don’t put in 3%, 4%, 5% all at once and then something happens, where it goes down.”
It would also be prudent for investors interested in crypto to buy and hold for the long term, as they would with other financial assets, Johnson said.
Morningstar suggests holding the cryptocurrency for at least 10 years, Arnott wrote.
